The Impact of Endogenous Investment on Economic Growth: An Analysis on Advance-Retreat Course Theory

Article excerpt

Advance-Retreat Course (ARC) is a theory that explains how socio-economic growth takes place. The main argument of ARC is that economies progress though a natural process of initiative followed by retreat in response to environmental pressures. Based on the conclusions of an analysis of ARC in the economic arena (F. Dai, et al., 2007, 2008 and 2009), this paper analyzes the impact of changes in interest rates and endogenous investments on long-term economic growth in terms of the principles of ARC theory. Based on the application of ARC theory, it develops a number of solutions to the problem of economic growth and provides an analytic technique for using ARC theory to suggest optimum endogenous investment strategies for stimulating economic growth. The empirical analysis, whose results are consistent with predictions from ARC theory, offers a number of suggestions for improving economic growth in the United States

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Introduction

Unlike the participants decribed in traditional traditional game theory, participants in the 'game' that is economics frequently choose their strategies positively, as a result of their own initiatives, or negatively, without such initiatives, in the face of environmental pressures. This causes problems for academic analysis because human actors or participants are free to choose and implement economic strategies with regard to their environments which do not give them optimum returns, frequently being based on choices that involve them responding passively to changes or alterations in their environment. The economic environment often 'forces' people to act passively under pressure or, in the opposite direction, makes them resist the forces for alteration or change. Relatively speaking, the faster and greater is economic growth, the greater these environmental pressure will be. This means that the process of economic growth should have periods of advance-when participants go along with the changes or alterations~and periods of retreat, when participants resist these alterations or changes. The procceses involved are much like boating with the current followed inevitably by boating against the current. Such processes have the following two basic characteristics:

* Humans as the subjects can implement initiative strategies to further their interests.

* Environments, as objects, can only passively 'accept' subjects actions, but it can will produce resistance or pressure to modify their actions in the opposite direction to that they want or desire.

These two - opposite- characterisitics give rise to problems that serve to Advance-Retreat Course theory (Dai, et ai, 2007). ARC theory has been used to analyse economic growth and development, along with a number of other theories, such as the cycle theory (Lucas, 1981) M, the real business cycle theory (Prescott, et al, 1982; Plosser, et al, 1988,1989) [2,3, 4], the new growth theory (Romer, 1986, 1990)I56], and. economic growth theory based on innovation and change (Solow, 1956, 1957 ; Jones, 1995,1998)[7,8,9, 1011I

In recent years, economists have made a lot of progress in studying economic growth and development, using dynamics methods from genetics and ecology perspectives to study ecomocic growth (Croix and Michel, 2002)I12], non-linear theory of economic growth (Fiaschi and Lavezzi, 2007)ll3], the invariance-in-growth theory and sustainable development (Martinet and Rotillon, 2007)[14], evolutionary process theory involving geographical clusters of firms and innovation (Pouder and John, 2003)[15], macroeconomic theory with respect to output dynamics and structural evolution (Ulrich and Thomas, 2008) |16]. However, a theory that integrates dynamics with ecology has not been suggested as a possible explanation for economic growth. The present paper argues that ARC theory as applied to economics deserves to be looked as a theory that provides a 'special way' of studying economic development. …